I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments—Friedrich August von Hayek
In this issue
The 7.6% 2022 GDP Boom: Throw Money into the System to Magnify Spending, Paint Inflation as Growth
I. How Statistics Clouds Audience Perception
II. The Essence of the 2022 GDP
III. 4Q 7.2% GDP: As Main Engines Sputtered, Exports Saved the Day
IV. 2022 GDP: Throwing Money into the System to Magnify the GDP, Paint Inflation as Inflation
The 7.6% 2022 GDP Boom: Throw Money into the System to Magnify Spending, Paint Inflation as Growth
A GDP 2022 7.6% BOOM! What's not to like? But this analysis shows why throwing money to magnify the GDP isn't sustainable and which untoward effects will be revealed over time.
I. How Statistics Clouds Audience Perception
We begin with our diagnosis of the GDP with related quotes from the survey results of a privately owned polling firm: SWS.
On Self-Rated Poverty: (all italics original)
The national Social Weather Survey of December 10-14, 2022, found 51% of Filipino families rated themselves as Mahirap or Poor, 31% rating themselves as Borderline (by placing themselves on a horizontal line dividing Poor and Not Poor), and 19% rated themselves as Hindi Mahirap or Not Poor. Compared to October 2022, the percentage of Poor families rose slightly from 49%, while Borderline families rose slightly from 29%, and Not Poor families fell slightly from 21% (SWS, 2023)
On Involuntary Hunger:
The national Social Weather Survey of December 10-14, 2022, found that 11.8% of Filipino families, or an estimated 3.0 million, experienced involuntary hunger – being hungry and not having anything to eat – at least once in the past three months. The December 2022 Hunger figure is slightly above the 11.3% (estimated 2.89 million families) in October 2022 and 11.6% (estimated 2.95 million families) in June 2022. However, it is slightly below the 12.2% (estimated 3.1 million families) in April 2022. (SWS, 2023)
On the Quality of Life:
The national Social Weather Survey of December 10-14, 2022 found 34% of adult Filipinos saying their quality-of-life was better than twelve months before (“Gainers”), 26% saying it got worse (termed by SWS as “Losers”), and 39% saying it was the same (“Unchanged”), compared to a year ago. (SWS, 2023)
Statistics, designed to present specific subjects, can mean differently to the consuming public. The variability of the outcome depends on its methodology and perhaps its sponsors.
As shown above, the first survey showed that a slight majority of families (51%) rated themselves as poor, whereas 31% considered themselves on the borderline. In sum, 82% of families felt economically deprived.
The second survey exhibited that 11.8% of the household experienced 'involuntary hunger,' up from 11.3% in Q3.
The third survey measured the sentiment of adults on the changes in the quality of life, which showed substantial improvements for a plurality.
In 2020, the estimated population was 109,035,000. And there were 26.39 million households with an average size of 4.1.
The first survey extrapolates to some 88.723 million people, who rated themselves as (poor and borderline) 'poor.'
The second survey exhibited that involuntary hunger covered about 12.71 million people in 4Q, higher than 12.3 million in Q3. That is to say, about 400 thousand+ people entered this dour category in the last quarter. (Using SWS estimates)
Ironically, the third survey, conducted over the same period as the first two, told a contrasting story relative to the first survey. It showed a better quality of life in 2022 for 23.3 million people, representing 34% of the adult population of 68.43 million. Yet, 66% of adults experienced little change or deterioration.
As it is, is being (borderline) 'poor' now equivalent to having a 'better quality of life?' Are standards of living being diminished through the contrast effect—when juxtaposing bad conditions with worse, bad becomes 'better'?
How valid or realistic are these estimates in the face of raging street prices of goods and services?
II. The Essence of the 2022 GDP
This discussion of mixed survey results leads us to the official survey-based GDP.
Businessworld, January 27,2023: THE PHILIPPINES weathered record inflation and interest rate increases last year by posting the fastest economic growth since 1976 — one of the strongest in Asia amid a dreary global outlook. Economic output grew by 7.2% in the three months through December from a year earlier, according to the local statistics agency, bringing the full-year expansion to 7.6%. This was better than the 7.5% estimate by economists in a BusinessWorld poll.
How accurate is the GDP when representing the economic conditions of the general populace?
Or better, how does a 7.6% GDP redound to welfare gains of the population?
Is the GDP representative of the majority? Or does it measure the activities of a few equipped with sizeable spending power?
The more important facet is, has the GDP been representative of productivity gains, or is it from credit-financed spending?
Figure 1
The Google mobility data explicitly distinguishes mobility patterns during the pandemic phase (2021), which was hobbled by restrictions, compared with the present 'return to the norm' conditions (2022). Google ended its mobility tracking on October 15, 2022. (Figure 1, topmost chart)
Of course, increased mobility from the reopening doesn't equate to more spending.
So, it required the reopening of businesses too, which translates to increases in investments and labor. And it also necessitated the resumption of public services.
Labor numbers, used as a basis to calculate the GDP, supposedly regained their pre-pandemic conditions. But the difference has been that the gains represented quantity. In contrast, job quality has been deteriorating.
And because consumption arises from production and the provision of services, savings signify a sine qua non. And credit, from the savings of others, plays a complementary role.
But with a low domestic savings rate—gross savings slumped to their second lowest level in Q3 2022, according to the CEIC—gains of the reopening depended on credit-financed public works and electoral activities, as well as credit-financed consumer spending. (Figure 1, middle chart)
Also, bank peso deposit liabilities had substantially been slowing.
Most importantly, the bedrock for the credit expansion emanated from the record liquidity transfusion by the BSP in 2020 to rescue the banking system.
Yet the ingredients for the revitalization of a 'reopened' economy dovetailed with its inflationary structural dynamics: credit-supported demand came in the face of supply-side maladjustments, dislocations, and bottlenecks here and abroad. Such conditions signified the essence of the 2022 GDP.
III. 4Q 7.2% GDP: As Main Engines Sputtered, Exports Saved the Day
Let us deal first with the 4Q real GDP.
Figure 2
Surprisingly, the main engines, the consumers and the government, played a subsidiary role in the 7.2% 4Q GDP, which signified the second lowest since Q2 2021. (Figure 2)
That's because the consumer GDP posted a 7.0% GDP, which likewise accounted for the slowest growth since Q2 2021.
In the meantime, though better than Q3 2022's .8%, government GDP was up by a paltry 3.3% in Q4 2022 but has slumped from Q4 2021's 7.8%.
Considering the sustained upstream in public spending, which has been adrift at record levels, it is a puzzle why the low "value-added," as expressed via the GDP.
Capital formation GDP also tanked to 5.9% from 21.8% in Q3 2022 and 14.2% in Q4 2021. The sector posted an average of 30.3% growth from Q2 2021 to Q3 2022.
Figure 3
It was exports that saved the day. The export GDP jumped 14.6%, its highest since Q2 2021's 28.6%.
On the other hand, imports also languished with a 5.9% GDP, lower than 17.8% in Q3. Imports had an average GDP of 19.1% from Q2 2021 to Q3 2022.
However, both imports and exports growth dived in December, which pulled down their respective GDPs.
In short order, all major expenditure side factors, except for exports, declined substantially.
One factor that must have helped the GDP was the lower (6.8%) spread between the nominal and the real GDP, representing the deflator, compared to the 7.9% Q4 GDP average.
The thing is, should external trade slow materially going forward, and should the CPI remain at a very high level, then GDP will lose its anchor.
There are logical inconsistencies in the GDP, though. While exports boomed, the manufacturing GDP was only 4.2% despite manufacturing loans growing at a febrile rate of over 15% in October and November.
A fiery 36.1% accommodations and food services GDP defied the supposed slowdown of household spending. Even retail GDP clocked in a 9.4% GDP in Q4. Who bought their stuff, ate at the restos, and luxuriated in staycations?
Yet, how do those self-rated poverty and hunger surveys square with the 4Q GDP?
IV. 2022 GDP: Throwing Money into the System to Magnify the GDP, Paint Inflation as Inflation
The annual GDP defines the character of economic performance.
Yes, the 4Q GDP was an oddity. Nonetheless, the official data revealed that consumer spending dominated in 2022. The intent of the end figures may have been to "shock and awe" the public to promote the administration's popularity.
But the GDP didn't delineate how consumers financed their binge. Mainstream projections and forecasts assume that these trends are irrepressible and can only move in their preferred direction, which implies that all actions can only have net benefits. For instance, one can borrow to spend unbounded.
Yes, record "revenge spending" was financed by record consumer borrowing from banks as the BSP implemented divergent monetary policies. (Figure 4, topmost window)
It tightened lending rates but kept consumer credit card rates capped. The BSP also liquidated deposits it held last December to bloat its net claims on the central government, which I called variant QE 2.0. (Prudent Investor, 2023)
And yes, record "revenge spending" was also financed by record money supply growth. (Figure 4, second to the highest pane)
The nominal figures of the bank consumer credit portfolio, the GDP, and M2 help reduce the amplification from the base effects.
Aside from bank credit expansion directed at economic agents, money supply growth manifested BSP operations coordinated with the banking system that helped finance the spending on national elections, the bureaucracy, public works, and other political boondoggles.
Despite the deceleration of the M2 % growth rate as a consequence of a black hole in the banking system piggybacked by the BSP rate hikes, M2 continues to carve new record highs.
And although consumers went on "revenge spending," the consumer slice of the GDP pie remained mired in a downtrend. (Figure 4, second to the lowest window)
In the 2015-2022 GDP, public spending has signified the most influential and powerful force, with its share uptrend coming at the expense of households and other sectors.
Though the fiscal deficit will likely trail the 2021 record marginally, as noted in the 4Q GDP, it has contributed less and less to the statistical simulacrum of the economy. (Figure 4, lowest window)
Instead, the private and public financial realm has been amassing tremendous amounts of leverage. Public debt reached Php 13.644 trillion in November.
And because liquidity has signified the primary instrument for central bank operations, the share of financial GDP has surged to all-time highs, since the BSP operations in 2020 and has remained there in 2022. (Figure 5, topmost left window)
In doing so, public debt and the credit portfolio of the banking system hit Php 23.86 trillion, or 109% of the NGDP! (Figure 5, topmost right pane) And that represents formal credit.
How about shadow financial institutions? According to the 2021 BSP Financial Inclusion report, the informal credit sector accounted for about half of the borrowings of the adult population!
Ironically, despite being the banking system's largest client, the share of the real estate GDP continues to cascade, which means diminishing "value-added" even with constant and expansionary infusions of credit.
The implication is that the spending of the real estate sector has not only been providing reduced returns via diminished cash flows but continues to build up credit and other economic and financial risks in tandem with banks.
And that’s not all.
And since peaking in 2018, the pie of capital formation was chipped in 2019, chopped in 2020, and bounced over the last two years. (Figure 5, second to the highest pane) But the bulk of capital spending has been on construction, which the role of the government has dramatically increased via infrastructure.
To this end, the 2022 GDP has barely been about productivity gains.
Instead, it represents politically driven credit-induced consumption from which the elevated CPI represents a symptom. Or throw money into the system to magnify a spending-based GDP. That's the secret formula.
And the fundamental backlash from this policy has been to widen the economic gap between demand and supply. So, the BSP raises rates to multi-year highs while claiming the CPI problem as a supply issue.
And yet official statistics confuse inflation with growth.
And part of that imbalance can be seen in the contrasting contributions of consumer GDP vis-a-vis trade and repair GDP. If accurate, it extrapolates to an intensifying buildup of excess capacity in the retail and ancillary sectors, funded again by leverage. (Figure 5, second to the lowest chart)
And by deduction, only a minority of the population (23%, 2021) borrowed from formal institutions to spend. And as prices rise, these households leveraged their balance sheets to cope with the loss of purchasing power. Many took advantage of the BSP’s credit card subsidies.
Is it a wonder why the majority of households rated themselves as poor while hunger rates rose?
Yet how sustainable is this dynamic? Will this not be subject to a reversion to the mean?
In conclusion, the 2022 GDP was a product of throwing money into the system that ballooned the CPI, which officials paint as "growth."
The establishment glorifies 2022 GDP as a feat similar to 1976. (Figure 5, lowest chart) Are they aware of the conditions that prevailed in that era? Do they know what this means or what path it leads to?
___
References
Social Weather Stations Fourth Quarter 2022 Social Weather Survey: 51% of Filipino families feel Poor; 31% feel Borderline, 19% feel Not Poor, January 10, 2023
Social Weather Stations Fourth Quarter 2022 Social Weather Survey: Hunger moves from 11.3% to 11.8%, January 19, 2023 SWS.org.ph
Social Weather Stations Fourth Quarter 2022 Social Weather Survey: Gainers minus Losers at +8 January 25, 2023 SWS.org.ph
Prudent Investor Newsletter, The BSP Unveils Stealth QE 2.0 (Variant)! January 15, 2023; Blog, Substack
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